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RQch11 - Suggested answers to selected Review Questions(Ch...

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Suggested answers to selected Review Questions: (Ch 11) 1.5 Aggregate expenditure has been smaller than GDP. 2.5 Consumption would become less sensitive to current income because consumers would be able to use borrowing to smooth out the effects of changes in their incomes. 2.6 The student’s reasoning is incorrect, because he has confused the investment (in the economic sense) of purchase of machinery, factories, and houses, with financial investment. 2.11 In general: S= Y-C MPC=change in C/change in Y MPC= 1-MPC 3.2 Firms will decrease production until they sell the unintended inventories. 3.3 Aggregate expenditure represents the total spending in the economy. Consumption spending is just one component of aggregate expenditure. The other components of aggregate expenditure are: planned investment, government purchases, and net exports. 3.8 a. Inventories are decreasing and Fiat is likely to increase its future production. b. Inventories are increasing and Sony is likely to decrease its future production. 3.11 “Business spending” refers to investment spending and it can lift or sink the economy through the multiplier process. The graph below illustrates the multiplier effect of an increase in
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